PAPER – 1: PRINCIPLES AND PRACTICE OF ACCOUNTING

Question No. 1 is compulsory.

Attempt any four questions from the remaining five questions.
Wherever necessary, suitable assumptions should be made and disclosed by way of note forming
part of the answer.
Working Notes should form part of the answer.
Question 1
(a) State with reasons, whether the following statements are true or false:
(i) Overhauling expenses for the engine of motor car to get better fuel efficiency is
revenue expenditure.
(ii) Depreciation is a non-cash expense and does not result in any cash outflow.
(iii) Fees received for Life Membership is a revenue receipt as it is of recurring nature.
(iv) If Closing Stock appears in the Trial Balance:
The closing inventory in then not entered in Trading Account. It is shown only in the
balance sheet.
(v) Inventory Turnover Ratio is also known as Stock Turnover Ratio.
(vi) If del-creders commission is paid to consignee, the loss of bad debts is to be borne
by the consignor. (6 x 2 = 12 Marks)
(b) Discuss the limitations which must be kept in mind while evaluating the Financial
Statements. (4 Marks)
(c) A Plant & Machinery costing ` 10,00,000 is depreciated on straight line assuming 10
year working life and zero residual value, for four years. At the end of the fourth year, the
machinery was revalued upwards by ` 40,000. The remaining useful life was reassessed
at 8 year. Calculate Depreciation for the fifth year. (4 Marks)
Answer
(a) (i) False: Overhauling expenses for the engine of the motor car is incurred to get better
fuel efficiency. These expenses will reduce the running cost in future and thus the
benefit is in the form of a long-term advantage. So overhauling expenses should be
capitalized.
(ii) True: Depreciation is a non-cash expense and unlike other normal expenditure (e.g.
wages, rent, etc.) does not result in any cash outflow. Therefore depreciation is a
non-cash expense and does not result in any cash outflow.
(iii) False: Life Membership Fee received for life membership is a capital receipt as it is
of non-recurring nature. It is directly added to capital fund or general fund.

© The Institute of Chartered Accountants of India

 2 FOUNDATION EXAMINATION: NOVEMBER, 2018

(iv) True: The closing stock appears in the trial balance only when it is adjusted against
purchases by passing the entry (in which Closing Stock A/c is debited and
Purchases A/c is credited). In this case, closing stock is not entered in Trading
Account and is shown only in Balance sheet.
(v) True: Inventory Turnover Ratio is also known as Stock Turnover Ratio. It
establishes the relationship between the cost of goods sold during the year and
average inventory held during the year.
(vi) False: To increase the sale and to encourage the consignee to make credit sales,
the consignor provides an additional commission generally known as del-credere
commission. In case del-credere commission is provided to consignee, bad debts is
no more the loss of the consignor and it is borne by the consignee.
(b) Limitations which must be kept in mind while evaluating the Financial Statements
are as follows:
(i) The factors which may be relevant in assessing the worth of the enterprise don’t
find place in the accounts as they cannot be measured in terms of money
(ii) Balance sheet shows the position of the business on the day of its preparation and
not on the future date while the users of the accounts are interested in knowing the
position of the business in the near future and also in the long run and not for the
past date.
(iii) Accounting ignores changes in some money factors like inflation etc.
(iv) There are occasions when accounting principles conflict with each other.
(v) Certain accounting estimates depend on the sheer personal judgment of the
accountant.
(vi) Different accounting policies for the treatment of same item adds to the probability
of manipulations.
(c) Calculation of depreciation for 5th year
(a) Depreciation per year charged for four years = ` 10,00,000 / 10 = ` 1,00,000
(b) WDV of the machine at the end of fourth year = ` 10,00,000 – ` 1,00,000 × 4
= ` 6,00,000.
(c) Depreciable amount after revaluation = ` 6,00,000 + ` 40,000 = ` 6,40,000
(d) Remaining useful life as per previous estimate = 6 years
(e) Remaining useful life as per revised estimate = 8 years
(f) Depreciation for the fifth year and onwards = ` 6,40,000 / 8 = ` 80,000.

© The Institute of Chartered Accountants of India

 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 3

Question 2
(a) The following mistakes were located in the books of a concern after its books were
closed and a Suspense Account was opened in order to get the Trial Balance agreed:
(i) Sales Day Book was overcast by ` 1,000.
(ii) A sale of ` 5,000 to X was wrongly debited to the Account of Y.
(iii) General expenses ` 180 was posted in the General Ledger as ` 810.
(iv) A Bill Receivable for ` 1,550 was passed through Bills Payable Book. The Bill was
given by P.
(v) Legal Expenses ` 1,190 paid to Mrs. Neetu was debited to her personal account.
(vi) Cash received from Ram was debited to Shyam ` 1,500.
(vii) While carrying forward the total of one page of the Purchases Book to the next, the
amount of ` 1,235 was written as ` 1,325.
Find out the nature and amount of the Suspense Account and Pass entries (including
narration) for the rectification of the above errors in the subsequent year’s books.
(10 Marks)
(b) Define the term “Royalty” and give any four examples for the same. (5 Marks)
(c) Attempt any one of the following two sub-parts i.e. Either (i) or (ii).
(i) From the following particulars prepare an account current, as sent by Mr. AB to Mr.
XY as on 31st October, 2018 by means of product method charging interest @ 5%
p.a.
Date Particulars (` )
1st July Balance due from XY 1,500
20th August Sold goods to XY 2,500
28th August Goods returned by XY 400
25th September XY paid by cheque 1,600
20th October Received cash form XY 1,000
(ii) Mr. Ganesh sends out goods on approval to few customers and includes the same
in the Sales Account. On 31.03.2018, the Trade Receivables balance stood at
` 75,000 which included ` 6,500 goods sent on approval against which no
intimation was received during the year. These goods were sent out at 30% over
and above cost price and were sent to-
Mr. Adhitya ` 3,900 and Mr. Bakkiram ` 2,600.

© The Institute of Chartered Accountants of India

 4 FOUNDATION EXAMINATION: NOVEMBER, 2018

Mr. Adhitya sent intimation of acceptance on 25th April, 2018 and Mr. Bakkiram
returned the goods on 15th April, 2018.
Make the adjustment entries and show how these items will appear in the Balance
Sheet as on 31st March, 2018. Show also the entries to be made during April, 2018.
Value of Closing Inventories as on 31st March, 2018 was ` 50,000. (5 Marks)
Answer
(a)
(i) P & L Adjustment A/c Dr. 1,000
To Suspense A/c 1,000
(Correction of error by which sales account was
overcast last year)
(ii) X Dr. 5,000
To Y 5,000
(Correction of error by which sale of ` 5,000 to X
was wrongly debited to Y’s account)
(iii) Suspense A/c Dr. 630
To P & L Adjustment A/c 630
(Correct of error by which general expenses of `
180 was wrongly posted as ` 810)
(iv) Bills Receivable A/c Dr. 1,550
Bills Payable A/c Dr. 1,550
To P 3,100
(Correction of error by which bill receivable of
` 1,550 was wrongly passed through BP book)
(v) P & L Adjustment A/c Dr. 1,190
To Mrs. Neetu 1,190
(Correction of error by which legal expenses paid to
Mrs. Neetu was wrongly debited to her personal
account)
(vi) Suspense A/c Dr. 3,000
To Ram 1,500
To Shyam 1,500
(Removal of wrong debit to Shyam and giving credit
to Ram from whom cash was received)
(vii) Suspense A/c Dr. 90
To P&L Adjustment A/c 90
(Correction of error by which Purchase A/c was
excess debited by `90/-, ie: `1,325 – `1,235)

© The Institute of Chartered Accountants of India

 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 5

Suspense A/c
` `
To P & L Adjustment A/c 630 By P & L Adjustment A/c 1,000
To Ram 1,500 By Difference in Trial 2,720
To Shyam 1,500 Balance (Balancing figure)
To P&L Adjustment A/c 90
3,720 3,720
(b) “Royalty” may be defined as Periodic payment made by one person (lessee) to another
person (lessor) for using the right by the lessee vested in the lessor.
Examples:
1. For the extraction of oil, coal, and minerals.
2. To an author for sale of his books.
3. To a patentee for the use of patent.
4. For use of technical knowhow developed by a party
(c) (i) XY in Account Current with AB as on 31st Oct, 2018
(`) Day Product (`) Days Product
s ( `) ( `)
01.07.18 To Bal. b/d 1,500 123 1,84,500 28.08.18 By Sales 400 64 25,600
Returns
20.8.18 To Sales 2,500 72 1,80,000 25.09.18 By Bank 1,600 36 57,600
31.10.18 To Interest 37 20.10.18 By Cash 1,000 11 11,000
20.10.18 By Balance of 2,70,300
Products
____ ______ 31.10.18 By Bal. c/d 1,037
4,037 3,64,500 4,037 3,64,500

Note:
5 1
Interest = ` 2, 70,300 x × = ` 37 (approx.)
100 365
(ii) In the Books of Mr. Ganesh
Journal Entries
Dr. Cr.
Date Particulars L.F. ` `
2018 Sales A/c Dr. 6,500

© The Institute of Chartered Accountants of India

 6 FOUNDATION EXAMINATION: NOVEMBER, 2018

March 31 To Trade receivables A/c 6,500

(Being the cancellation of original entry
for sale in respect of goods lying with
customers awaiting approval)
March 31 Inventories with Customers on Sale or Dr. 5,000
Return A/c
To Trading A/c (Note 1) 5,000
(Being the adjustment for cost of goods
lying with customers awaiting approval)
April 25 Trade receivables A/c Dr. 3,900
To Sales A/c 3,900
(Being goods costing worth ` 3,900 sent
to Mr. Aditya on sale or return basis has
been accepted by him)
Balance Sheet of Mr. Ganesh as on 31st March, 2018 (Extracts)
Liabilities ` Assets ` `
Trade receivables (` 75,000 - ` 6,500) 68,500
Inventories-in-trade 50,000
Add: Inventories with customers on
Sale or Return 5,000 55,000
1,23,500
Notes:
(1) Cost of goods lying with customers = 100/130 x ` 6,500 = ` 5,000
(2) No entry is required on 15th April, 2018 for goods returned by Mr. Bakkiram. Goods
should be included physically in the Inventories.
Question 3
(a) Dinesh, Ramesh and Naresh are partners in a firm sharing profits and losses in the ratio
of 3:2:1. Their Balance Sheet as on 31st March, 2018 is as below:
Liabilities (` ) Assets (` )
Trade payables 22,500 Land & Buildings 37,000
Outstanding Liabilities 2,200 Furniture & Fixtures 7,200
General Reserve 7,800 Closing stock 12,600
Capital Accounts: Trade Receivables 10,700
Dinesh 15,000

© The Institute of Chartered Accountants of India

 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 7

Ramesh 15,000
Naresh 10,000 40,000
Cash in hand 2,800
Cash at Bank 2,200
72,500 72,500
The partners have agreed to take Suresh as a partner with effect from 1 st April, 2018 on
the following items:
(i) Suresh shall bring ` 8,000 towards his capital.
(ii) The value of stock to be increased to ` 14,000 and Furniture & Fixtures to be
depreciated by 10%.
(iii) Reserve for bad and doubtful debts should be provided at 5% of the Trade
Receivables.
(iv) The value of Land & Buildings to be increased by ` 5,600 and the value of the
goodwill be fixed at ` 18,000.
(v) The new profit sharing ratio shall be divided equally among the partners.
The outstanding liabilities include ` 700 due to Ram which has been paid by Dinesh.
Necessary entries were not made in the books.
Prepare (i) Revaluation Account, (ii) Capital Accounts of the partners, (iii) Balance Sheet
of the firm after admission of Suresh.
(b) Mr. Fazhil is a proprietor in business of trading. An abstract of his Trading and P&L
account is as follows:
Trading and P&L A/c for the year ended 31st March, 2018
Particulars (`) Particulars (`)
To Cost of Goods sold 22,00,000 By Sales 45,00,000
To Gross Profit C/d ? 45,00,000
By Gross Profit B/d ?
To Salaries paid 12,00,000 By Other Income 45,000
To General Expenses 6,00,000
To Selling Expenses ?
To Commission to Manager (On
net profit before charging such
commission) 1,00,000
To Net Profit ?
? ?

© The Institute of Chartered Accountants of India

 8 FOUNDATION EXAMINATION: NOVEMBER, 2018

Selling expenses amount to 1% of total Sales

You are required to compute the missing figures.
Answer
(a) Revaluation Account
2018 ` 2018 `
April To Provision for bad 535 April By Inventory 1,400
1 and doubtful debts 1 in trade
To Furniture and 720 By Land and 5,600
fittings Building
To Capital A/cs:
(Profit on
revaluation
transferred)
Dinesh 2,872.50
Ramesh 1,915.00
Naresh 957.50 5,745
7,000 7,000
Partners’ Capital Accounts
Particulars Dinesh Ramesh Naresh Suresh Particulars Dinesh Ramesh Naresh Suresh
` ` ` ` ` ` ` `
To Dinesh 1,500 4,500 By Balance b/d 15,000 15,000 10,000 –
&
Ramesh By General 3,900 2,600 1,300
Reserve
To Balance 26,972.50 21,015 10,757.50 3,500 By Cash – – – 8,000
c/d
By Naresh & 4,500 1,500 – –
Suresh
By Outstanding 700 – –
Liabilities
(Ram)
By Revaluation 2,872.50 1,915 957.50 -
A/c
26,972.5 21,015 12,257.50 8,000 26,972.50 21,015 12,257.50 8,000

© The Institute of Chartered Accountants of India

 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 9

Working Note:
Calculation of sacrificing ratio
Partners New share Old share Sacrifice Gain
Dinesh ¼ 3/6 6/24
Ramesh ¼ 2/6 2/24
Naresh ¼ 1/6 2/24
Suresh ¼ 6/24
Entry for goodwill adjustment
Naresh (2/24 of `18,000) Dr. 1,500
Suresh (6/24 of `18,000) Dr. 4,500
To Dinesh (6/24 od `18,000) 4,500
To Ramesh (2/24 of `18,000) 1,500
Balance Sheet of M/s. Dinesh, Ramesh, Naresh and Suresh as on 1-4-2018
Liabilities ` ` Assets ` `
Trade payables 22,500 Land and Buildings 42,600
Outstanding Liabilities 1,500 Furniture 6,480
(2,200-700)
Capital Accounts of Inventory of goods 14,000
Partners :
Mr. Dinesh 26,972.50 Trade receivables 10,700
Mr. Ramesh 21,015.00 Less: Provisions (535) 10,165
Mr. Naresh 10,757.50 Cash in hand 2,800
Mr. Suresh 3,500.00 62,245 Cash at Bank 10,200
(2,200+8,000)
86,245 86,245
(b) Trading and P&L A/c for the year ended 31st March 2018
Dr. Cr.
Particulars ` Particulars `
To Cost of Goods Sold 22,00,000 By Sales 45,00,000
To Gross Profit c/d 23,00,000
45,00,000 45,00,000
To Salaries A/c 12,00,000 By Gross Profit b/d 23,00,000

© The Institute of Chartered Accountants of India

 10 FOUNDATION EXAMINATION: NOVEMBER, 2018

To General Expenses 6,00,000 By Other Income 45,000

To Selling Expenses 45,000
(1% of 45,00,000)
To Commission to Manager (on Net
Profit before charging such
commission) 1,00,000
To Net Profit 4,00,000
23,45,000 23,45,000
Question 4
(a) Raj of Gwalior consigned 15,000 kgs of Ghee at ` 30 per kg to his agent Siraj at Delhi.
He spent ` 5 per kg as freight and insurance for sending the Ghee at Delhi. On the way
100 kgs. of Ghee was lost due to the leakage (which is to be treated as normal loss) and
400 kgs. of Ghee was destroyed in transit. ` 9,000 was paid to consignor directly by the
Insurance company as Insurance claim.
Siraj sold 7,500 kgs. at ` 60 per kg. He spent ` 33,000 on advertisement and recurring expenses.
You are required to calculate:
(i) The amount of abnormal loss
(ii) Value of stock at the end and
(iii) Prepare Consignment account showing profit or loss on consignment, if Siraj is
entitled to 5% commission on sales.
(b) Prepare a bank reconciliation statement from the following particulars as on 31st March, 2018.
Particulars (` )
Debit balance as per bank column of the cash book 18,60,000
Cheque issued to creditors but not yet presented to the Bank for 3,60,000
payment
Dividend received by the bank but not entered in the Cash book 2,50,000
Interest allowed by the Bank 6,250
Cheques deposited into bank for collection but not collected by bank 7,70,000
up to this date
Bank charges not entered in Cash book 1,000
A cheque deposited into bank was dishonoured, but no intimation 1,60,000
received
Bank paid house tax on our behalf, but no intimation received form 1,75,000
bank in this connection
(10 Marks + 10 Marks = 20 Marks)

© The Institute of Chartered Accountants of India

 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 11

Answer
(a) Consignment Account
` `
To Goods sent on consignment 4,50,000 By Consignee’s A/c-Sales 4,50,000
A/c (15,000 kg x ` 30) (7,500 kg x ` 60)
To Cash A/c 75,000 By Abnormal Loss A/c
(Expenses 15,000 kg x ` 5) (Insurance claim - WN) 9,000
To Consignee’s A/c: Add: Abnormal Loss (WN) 5,000 14,000
Advertisement & 33,000 (Profit and Loss Account)
Recurring expenses
Commission @ 5% on 22,500 By Consignment Stock A/c 2,46,690
`4,50,000
To Profit and loss A/c 1,30,190
(Profit on Consignment) _______
7,10,690 7,10,690

Working Notes:
1. Abnormal Loss:
Cost of goods lost: 400 kg
Total cost (400 x ` 30) 12,000
Add: expenses incurred by the consignor @ `5 per kg 2,000
Gross Amount of abnormal loss 14,000
Less: Insurance claim (9,000)
Net abnormal loss 5,000
2. Valuation of Inventories
Quantity (Kgs) Amount (`)
Total Cost (15,000 kg x `30) 15,000 4,50,000
Add: Expenses incurred by the consignor 75,000
Less: Value of Abnormal Loss – 400 kgs (WN 1) (400) (14,000)
14,600 5,11,000
Less: Normal Loss (100)
14,500 5,11,000
Less: Quantity of ghee sold (7,500)
Quantity of Closing Stock 7,000
Value of 7,000 kgs – (5,11,000/14,500) x 7,000 2,46,690

© The Institute of Chartered Accountants of India

 12 FOUNDATION EXAMINATION: NOVEMBER, 2018

(b) Bank Reconciliation Statement as on 31st March, 2018

Particulars Details Amount
` `
Debit balance as per Cash Book 18,60,000
Add: Cheque issued but not yet presented to bank 3,60,000
for payment
Dividend received by bank not entered in cash book 2,50,000
Interest credited by bank 6,250 6,16,250
24,76,250
Less: Cheques deposited into bank but not yet 7,70,000
collected
Bank charges debited by Bank 1,000
Cheque deposited into bank was dishonoured 1,60,000
House tax paid by bank 1,75,000 (11,06,000)
Credit balance as per Pass Book 13,70,250
Question 5
(a) You are provided with the following:
Balance Sheet as on 31st March, 2017
Liabilities (`) Assets (` )
Capital Fund 1,06,200 Building 1,50,000
Subscription received in Advance 6,000 Outstanding Subscription 3,800
Outstanding Expenses 14,000 Outstanding Locker Rent 2,400
Loan 40,000 Cash in hand 20,000
Sundry Creditors 10,000
Total 1,76,200 1,76,200

The Receipts and Payment Account for the year

ended on 31st March, 2018
Receipts (` ) Payment (` )
To Balance b/d By Expenses:
Cash in Hand 20,000 For 2017 12,000
To Subscriptions: For 2018 20,000 32,000
For 2017 2000 By Land 40,000

© The Institute of Chartered Accountants of India

 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 13

For 2018 21,000 By Interest 4,000

For 2019 1,000 24,000 By Miscellaneous Expenses 4,700
To Entrance Fees 38,000 By Balance c/d
To Locker Rent 7,000 Cash in Hand 18,300
To Sale proceeds of old 1,000
newspapers
To Miscellaneous Income 9,000
99,000 99,000
You are required to prepare Income and Expenditure account for the year ended 31 st
March, 2018 and a Balance Sheet as at 31st March, 2018 (Workings should form part of
your answer).
(b) With the following ratios and further information given below, you are required to prepare
a Trading account and Profit & Loss account and a Balance Sheet of Sri Ganesh:
(i) Gross Profit Ratio = 25%
(ii) Net Profit/Sales = 20%
(iii) Stock Turnover Ratio = 10
(iv) Net Profit/Capital = 1/5
(v) Capital to Total other Liabilities = 1/2
(vi) Fixed Assets/Capital = 5/4
(vii) Fixed Assets/Total Current Assets = 5/7
(viii) Fixed Assets = ` 10,00,000
(ix) Closing Stock = ` 1,00,000 (10 Marks + 10 Marks = 20 Marks)
Answer
(a) Income and Expenditure Account for the year ended 31st March, 2018
Expenditure ` Income `
To Expenses 20,000 By Subscriptions (21,000 + 6,000) 27,000
To Interest 4,000 By Locker rent (7,000 - 2,400) 4,600
To Misc. Expenses 4,700 By Sale proceeds of old 1,000
To Surplus newspapers
12,900 By Misc. income 9,000

41,600 41,600

© The Institute of Chartered Accountants of India

 14 FOUNDATION EXAMINATION: NOVEMBER, 2018

Balance Sheet as at 31st March, 2018

Liabilities Amount Assets Amount
(`) (`)
Capital fund Land and Building 1,90,000
Bal. as on 1.4.2017 1,06,200 Subscription
receivable (2017) 1,800
Add: Entrance fee 38,000 (3,800 – 2,000)
Add: Surplus 12,900 1,57,100
Loan 40,000 Cash in hand 18,300
Creditors 10,000
Outstanding expenses 2,000
(2017) (14,000-12,000)
Subscription received in
advance 1,000 _____
2,10,100 2,10,100
Note: Entrance fees have been capitalized in the above solution.
(b) Trading and Profit and Loss Account for the year ended……………
` `
To Opening Stock 20,000 By Sales 8,00,000
To Purchases (Balancing figure) 6,80,000
To Gross Profit c/d 2,00,000 By Closing stock 1,00,000
9,00,000 9,00,000
To Expenses 40,000 By Gross Profit b/d 2,00,000
To Net Profit
1,60,000
2,00,000 2,00,000
Balance Sheet of Sri Ganesh as at………….
Liabilities ` Assets `
Capital Fixed assets 10,00,000
Opening Balance 6,40,000
Add: Net Profit 1,60,000 Closing stock 1,00,000
8,00,000
Current Liabilities 16,00,000 Other Current assets 13,00,000
24,00,000 24,00,000

© The Institute of Chartered Accountants of India

 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 15

1. Fixed Asset is `10,00,000

Fixed Assets / Capital = 5/4
Therefore, Capital – `10,00,000 x 4/5 = `8,00,000
2. Capital is ½ of Total Liabilities
Therefore Liabilities = `8,00,000 x 2 = `16,00,000
3. Net Profit is 1/5 of Capital
Therefore Net Profit = `8,00,000 x 1/5 = `1,60,000
4. Net Profit is 20% of Sales
Therefore Sales = `1,60,000 x 100/20 = `8,00,000
5. Gross Profit Ratio = 25% of Sales
Therefore, Gross Profit = `8,00,000 x 25% = `2,00,000
6. Stock Turnover Ratio (i.e. Cost of Sales/Average Inventory) is 10
Cost of Sales = Sales – Gross Profit
= `8,00,000 – `2,00,000
= `6,00,000
Therefore Average Inventory = `6,00,000 / 10 = `60,000
7. Closing Stock is `1,00,000
Average Inventory = `60,000
Therefore, Opening Stock = (`60, 000 x 2) - Rs1,00,000 = `20,000
8. Fixed Assets is `10,00,000
Fixed Assets / Total Current Assets = 5/7
Therefore, Total Current Assets is 10,00,000 x 7/5 = `14,00,000
Closing Stock = `1,00,000
Therefore other Current Assets = `13,00,000
Question 6
(a) Give necessary journal entries for the forfeiture and re-issue of shares:
(i) X Ltd. forfeited 300 shares of ` 10 each fully called up, held by Ramesh for non-
payment of allotment money of ` 3 per share and final call of ` 4 per share. He paid
the application money of ` 3 per share. These shares were re-issued to Suresh for
` 8 per share.

© The Institute of Chartered Accountants of India

 16 FOUNDATION EXAMINATION: NOVEMBER, 2018

(ii) X Ltd. forfeited 200 shares of ` 10 each (` 7 called up) on which Naresh had paid
application and allotment money of ` 5 per share. Out of these, 150 shares were re-
issued to Mahesh as fully paid up for ` 6 per share.
(iii) X Ltd. forfeited 100 shares of ` 10 each (` 6 called up) issued at a discount of 10%
to Dimple on which she paid ` 2 per share. Out of these, 80 shares were re-issued
to Simple at ` 8 per share and called up for ` 6 share.
(b) Pure Ltd. issues 1,00,000 12% Debentures of ` 10 each at ` 9.40 on 1st January, 2018.
Under the terms of issue, the Debentures are redeemable at the end of 5 years from the
date of issue.
Calculate the amount of discount to be written-off in each of the 5 years.
(c) Karan purchased goods from Arjun, the average due date for payment in cash is
10.08.23018 and the total amount due is ` 1,75,800. How much amount should be paid
by Karan to Arjun, if total payment is made on following dates and interest is to be
considered at the rate of 15% p.a.
(i) On average due due
(ii) On 28th August, 2018
(iii) On 29th July, 2018 (10 + 5 + 5 = 20 Marks)
Answer
(a) (i) Journal Entries in the books of X Ltd.
Date Dr. Cr.
` `
(a) Equity Share Capital A/c Dr. 3,000
To Equity Share Allotment money A/c 900
(300 x ` 3)
To Equity Share Final Call A/c (300 x ` 4) 1,200
To Forfeited Shares A/c (300 x ` 3) 900
(Being the forfeiture of 300 equity shares of
` 10 each for non-payment of allotment money
and final call, held by Ramesh as per Board’s
resolution No…………….dated……………..)
(b) Bank Account (300 x 8) Dr. 2,400
Forfeited Shares Account (300x 2) Dr. 600
To Equity Share Capital Account 3,000
(Being the re-issue of 300 forfeited shares @
` 8 each as fully paid up to Suresh as per

© The Institute of Chartered Accountants of India

 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 17

Board’s resolution No……….dated……………..)

(c) Forfeited Shares Account Dr. 300
To Capital Reserve Account 300
(Being the profit on re-issue, transferred to
capital reserve)
(ii)
Date Dr. Cr.
` `
(a) Equity Share Capital A/c (200 x ` 7) Dr. 1,400
To Equity Share First Call A/c (200 x ` 2) 400
To Forfeited Shares A/c (200 x ` 5) 1,000
(Being the forfeiture of 200 equity shares of
` 10/- (`7 called up) for non-payment of first
call @ ` 2/- per share as per Board Resolution
No………. dated………………)
(b) Bank Account Dr. 900
Forfeited Shares Account Dr. 600
To Equity Share Capital Account 1,500
(Being the re-issue of 150 forfeited shares as
fully paid up as per Board’s resolution
No.…………… dated…………..)
(c) Forfeited Shares Account Dr. 150
To Capital Reserve Account 150
(Being the profit on re-issue, transferred to
capital reserve)
Working Note:
Balance in forfeited shares account on forfeiture of 150 shares (150 x 5) `750
Less: Forfeiture of 150 shares (`600)
Profit on re-issue of shares `150
(iii)
Date Dr. Cr.
` `
(a) Equity Share Capital A/c (100 x ` 6) Dr. 600

© The Institute of Chartered Accountants of India

 18 FOUNDATION EXAMINATION: NOVEMBER, 2018

To Equity Share Final Call A/c (100 x ` 3) 300

To Discount on issue of shares (100 x ` 1) 100
To Forfeited Shares A/c (100 x ` 2) 200
(Being the forfeiture of 100 equity shares issued
at a discount as per Board’s resolution
No………….dated…….)
(b) Bank Account (80 x ` 6) Dr. 480
Discount on issue of shares (80 x ` 1) Dr. 80
Forfeited Shares A/c (80 x ` 1) Dr. 80
To Equity Share Capital Account (80 x ` 8) 640
(Being the re-issue of 80 shares fully paid up as
per Board’s Resolution No………dated……….)
(c) Forfeited Shares Account 80
To Capital Reserve Account 80
(Being the profit on re-issue, transferred to
capital reserve)
Working Note:
Balance in forfeited shares account on forfeiture of 100 shares (100 x 2) ` 200.00
Forfeited shares balance for 80 shares ` 160
Less: Forfeiture of 80 shares (` 80.00)
Profit on re-issue of shares ` 80.00
Note: It may be noted that the facts given in the question are not in compliance with
Companies Act, 2013. As per Section 53 of Companies Act, 2013 a company cannot issue
shares at discount except for in case of sweat equity shares and therefore any issue on
discount by the company is void. However, the above answer has been given strictly based
on the information provided in the question.

(b) Total amount of discount comes to ` 60,000 (` 0.6 X 1, 00,000). The amount of discount
to be written-off in each year is calculated as under:
Year end Debentures Ratio in which discount Amount of discount to be
Outstanding to be written-off written-off
1st ` 10, 00,000 1/5 1/5th of ` 60,000 = ` 12,000
2nd ` 10, 00,000 1/5 1/5th of ` 60,000 = ` 12,000
3rd ` 10, 00,000 1/5 1/5th of ` 60,000 = ` 12,000

© The Institute of Chartered Accountants of India

 PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING 19

4th ` 10, 00,000 1/5 1/5th of ` 60,000 = ` 12,000

5th ` 10, 00,000 1/5 1/5th of ` 60,000 = ` 12,000
(c)
A B C D=B ±C
Principal Interest from Average Due Date to Actual date Total amount
Amount of Payment to be paid
(i) Payment on average due date
` 1,75,800 ` 1,75,800 x 15/100 x 0/365 =0 ` 1,75,800
(ii) Payment on 28th Aug. 2018
` 1,75,800 ` 1,75,800 x 15/100 x 18/365= 1,300
Interest to be charged for period of 18 days ` 1,77,100
from 10th August 2018 to 28th Aug. 2018
(iii) Payment on 29th July, 2018
` 1,75,800 ` 1,75,800 x 15/100 x (12)/365= (867)
Rebate has been allowed for unexpired credit ` 1,74,933
period of 12 days from 29.7.2018 to 10.8.2018

© The Institute of Chartered Accountants of India